Protectionism

Protectionism

How strong an argument can be made for protectionist policies?

protectionism• We’ve spoken about various protectionist

policies such as tariffs, import quotas, subsidies and voluntary export restraints.

• What were the benefits that arose from these policies?

• Did the benefits seem to outweigh the costs or did the costs outweigh the benefits?

Protectionism• We’re not the only students of Economics who

believe that the costs of protectionism surpass the benefits, yet supporters of protectionism are still out there and influencing policy. We’ll take a look at the validity of their arguments

Protectionism• One of the most commonly cited arguments

in favour of protectionism is the idea that it is needed to give infant industries a chance to succeed.

• If production of a particular good has just begun domestically, established foreign producers will have a head start and may already be producing at a lower cost.

• How can new domestic producers compete with foreign firms that may already be experiencing economies of scale?

Infant industries

Infant industries• The answer is that new domestic industries

would not have a very good chance at survival without some sort of protectionist policy.

• It is possible that a country could eventually achieve a comparative advantage in the production of a certain good, even if it starts to produce later than another country.

• In this example, protectionist policies could be justified under the condition that the protectionist policies are temporary

Infant industries• Critics of the infant industry argument point to

several potential problems, including:• How accurately can government identify

industries that could eventually result in a comparative advantage?

• Once an industry is granted protection, where are the incentives for that industry to innovate and produce at more efficient levels?

• Will government be strong enough to remove the protection in the future?

Strategic Trade policy• Another argument in favour of protection

argues that certain industries are so vital to a country’s well-being that they must be protected so economies of scale can eventually be achieved, giving a country comparative advantage in a dynamic and valuable industry.

• What types of industries fall into this category?

Probably not these

But maybe these

Strategic Trade policy• Supporters of protectionist policies argue that

technology is so important to future economic growth that it is in a country’s best interest to ensure that they achieve comparative advantage in this field.

• Barriers to trade, subsidies, low interest loans, tax advantages, and government sponsored research and development can all foster growth in these industries, but the WTO doesn’t want to hear about it

Criticisms of Strategic Trade policy

• What industries could potentially achieve comparative advantage?

• What protectionist policies should be implemented?

• What if all countries try to achieve comparative advantage in the same industries?

• What if government never removes the protectionist policies?

How about some variety?

Diversification• Supporters of protectionism warn of the

dangers of too much specialization. They argue that protectionism gives a country opportunity to develop a broader range of industries and not be just another banana republic

Diversification• Diversification may prevent developing

countries from relying on one primary sector good and provides protection against price or supply changes

• Diversification may allow a developing country to move beyond agricultural production to processing and more technologically advanced areas which may lead to more economic growth

National Defense• Some policy makers argue that certain goods

are essential to national defense and must be protected to ensure the country’s ability to defend itself. When tensions arise, you don’t want to have to be reliant on imports to keep your country safe.

• What types of goods are we talking about?

Probably not these again

But maybe these

National Defense?• Apparently some countries (who will not be

named, ok the U.S.A) protect the following goods because they are necessary for national defense. They are:

• Gloves• Umbrellas• Candles• Plastics

Government revenue• We talked about the potential for tariffs to

raise government revenue. This is more common in LDCs because the tax can be easily collected and because income tax may not provide government with enough revenue.

• However, the use of tariffs as a way to collect revenue is imperfect as it is a regressive tax, creates a misallocation of resources, and may prevent government from introducing more effective means of taxation

Correcting trade imbalances

• Supporters of protectionist policies argue that they can correct a situation in which a country imports much more than it exports. However, this often just leads to trading partners enacting similar policies, and the net effects are muted.

Anti-Dumping• Dumping is the exporting of goods to other

countries at a price that is lower than cost of production, usually this occurs when export subsidies are granted.

• While illegal, countries still practice this. Supporters of protectionism argue they should be able to keep these cheap goods out of their country, but recognizing when this is actually happening can be quite difficult. Countries often use this as an excuse to restrict foreign competition

Protect domestic jobs• If we produce more at home than there

should be more jobs for our countrymen. However, this can negatively affect the economy of trading partners, and the whole world suffers.

• We also saw with the example of the U.S. sugar import quota that firms may shift operations overseas, thus eliminating jobs.

• Subsidies would be least harmful as production does not decrease.

Wage protection• Protectionists argue that foreign countries can

sell at a lower price because wages are lower abroad. While this may be true, wages are just one component of production costs. And even if the foreign country can produce at a lower cost, the law of comparative advantage says they should be producing this good. So……

Last word on protectionism,

• Economists love some free trade and don’t consider protectionism a wise policy, especially for more developed countries. The arguments we have just considered range from reasonably sound to absurd…